Gold Price Consolidating Near Record Highs

Physical demand for gold and silver is strong as investors seek protection of wealth against uncertainty in the Middle East. It has already been reported that Col. Qaddafi has been a wise gold investor, preparing for this crisis by hoarding a large amount of the precious metal to fund his military and to hedge against economic sanctions. Just like he’s been hoarding precious metals, many throughout the Middle East are trying to sell their assets and seek out the shelter of safe havens. It is being reported by the International Monetary Fund that Qaddafi has amassed one of the largest gold positions in the world. Libya’s gold reserves are estimated to be worth over $6 billion, and the gold can be used to buy paid fighters. At a time when international sanctions have been increased, gold has been Qaddafi’s store of wealth; he appears to have been ready for this day because Libya’s holdings are much larger when compared to countries with similar demographics.

Egypt (Market Vectors Egypt Index ETF (EGPT)) tried to reopen their markets but had to shut them immediately as investors are liquidating Middle Eastern assets (SPDR S&P Emerging Middle East & Africa (GAF)) for the safe haven of gold (ProShares Ultra Gold (UGL)) and silver (ProShares Ultra Silver (AGQ)). Egypt’s shares have tumbled to new lows, while silver is exploding and gold is just ready to make its next move into record-high territory. Middle East crisis fears should put pressure on fiat currencies as investors flee to the safe havens of gold and silver which are regarded as an alternative form of authentic value.

European leaders will meet this week to try to resolve the debt crisis. All eyes are on Portugal whose government is in danger of collapsing and in need of bailout. Watch for a move out of the euro to support precious metals prices as the euro reaches its descending upper resistance level. For the past two years the euro and the dollar have done this inverted dance wherein one goes up and the other goes down. But one thing I am not fooled about is the fact that they are both in secular long-term downtrends.

My late January buy signal in precious metals was easier to pinpoint with gold (SPDR Gold Shares (GLD)) as the two-year uptrend stayed intact and provided a low-risk high-reward buypoint. Over the past two years since the credit crisis, I have highlighted the precious metals sector, especially gold and silver (iShares Silver Trust (SLV)) as I believed governments would do everything possible to prevent deflation. This has come true as quantitative easing and the printing of dollars has caused a major run into hard assets and key commodities as investors have sought safety from fiat currency risk and soaring deficits. One must trust this trend in precious metals and not be shaken off unless there are signs of a parabolic top. These markets will not end until moves become erratic and panic-driven. I have not seen that yet in the gold market. Although the silver market since the fourth quarter of 2010 has been outperforming gold and moving parabolically, it is catching up as it underperformed for the first half of 2010 and 2009.

The Middle East tensions and uncertainty combined with a resurgence of sovereign debt fears could provide the next catalyst for gold and silver to continue their runs into new high territory. A downturn in the euro could provide short-term relief for the US dollar, but it is clearly evident that both currencies are in a secular downtrend.

It is not just Libya tensions, but violence in Syria is also surging as protestors are being fired upon. Yemen’s government is in danger of collapsing, and all eyes are still on Bahrain. The Shiite versus Sunni friction is increasing between Iran and Saudi Arabia over the control of the Strait of Hormuz. Bahrain is one of the major US allies in the Middle East and is mostly Shiite, but is currently controlled by Sunni Muslim King Hamad bin Isa Al Khalifa. Many of the dissidents believe that Bahrain should be part of Iran, and Iran still claims that land as their own. The Sunni King has already foiled a coup. The Saudis are growing nervous as a loss of Bahrain would spell disaster for an imminent uprising in Saudi Arabia, causing a oil spike never seen before.

At the end of January 2011 as precious metals faced its first severe sell-off since July of 2010, I said we could expect a significant turn as conditions became quite oversold and reached long-term trend support. Now gold and silver are consolidating at new highs after facing three tight weeks as traders continue to take profits at record highs.